Yesterday Chris Powell of GATA criticised an article by Clif Droke on market manipulation. One point caught my eye, where Chris identified “an ‘ipse dixit’, an assertion made without authority” that Clif made, namely that “the market for gold is immensely huge and virtually impossible for any one entity to control its price swings … Even a coterie of interests devoted to pushing gold prices lower would meet with certain failure due to the enormous size and complexity of the market.”

It is one thing for Clif to claim that one entity could not control the gold market, but it strikes me as quite bold to claim a “devoted coterie” could not do it. To assess Clif’s claim we need factual examples of gold market liquidity so that we can “assert with authority” and solve this ipse dixit problem. Being the gold nerd that I am, over the past few years I have accumulated a number of statements about actual gold market liquidity (primarily because I’ve been annoyed with trite statements about how gold is “highly liquid” without any quantification) and thankfully now I have a use for them.

My simplistic understanding of “liquidity” is how much gold one can trade without affecting the market price. Below are some quotes that refer to actual trade sizes by people in the industry and their effect on price, both approximate and quantified.

Me, Feb 2012: “One could execute up to a tonne in one lot with a bullion bank at spot. … If someone was silly enough to ask a bullion bank to commit to a price for a 10 tonne lot, then from what I have been able to establish, the bank would adjust their spot price by around $10.”

Edel Tully, Nov 2012: “Brazil’s holdings expanded 17.2 tons last month … This is a chunky purchase … and was one of the key factors that gave prices a reasonable floor last month”

Mark Dow, June 2013: “Buying $300mm [7 tonnes] of gold can move the market up by less than a percent [$12 an ounce] in a normal market. But when sentiment for gold turns adverse, selling $300mm can drive it down, say, 2-3%.”

CNBC, Oct 2013: “Gold lost $25 in two minutes … a single sell order could be the culprit. It appears to have been an order to sell 5,000 gold futures contracts [15 tonnes] at market, Eric Hunsader of Nanex told CNBC.com”

ICE Benchmark Administration, Gold Auction Specifications: “Maximum Order Size 100,000 oz [3 tonnes] … This is a simple fat finger test designed to prevent the accidental input of large orders. In the event a user wishes to place an order greater than the maximum size they have the option to break the order down into smaller chunks”

Reuters, May 2015: “each interbank call would ‘shift orders of 50,000 ounces [1.5 tonnes] a time’, providing significant liquidity flows … Customers with smaller volumes are probably getting tighter spreads and better prices … but when somebody has size to do, especially with algos out there, it can hit pockets of illiquidity and cause spikes or flash crashes”

FT.com, May 2015: “if you want to transact in a decent size, which used to be 100,000 [3 tonnes] to 200,000 [6 tonnes] ounces. That has become harder to get away with without influencing the price unduly”

My takeaway from the above is that one can deal a couple of tonnes without affecting the gold price much – a bullion bank may widen the spread by tens of cents. However, once you get above 5 tonnes you will affect the price. From the quotes we get these figures:

$12 with 7t = $1.70 per tonne

$10 with 10t = $1.00 per tonne

$25 with 15t = $1.66 per tonne

$48 with 22t = $2.18 per tonne

What is 20 tonnes worth? At $1,100 per ounce it equals $700 million. Yes that is a lot, but there is a lot of money out there – for example, see this post where I calculated that if just “four groups decided to use only 2% of the $281.7 billion they manage to short gold. That would total 145 tonnes of gold”. Or consider what Ray Dalio said in this Sep 2012 interview “the capacity of moving money into gold in a large number is extremely limited … So the players in the world that … I have contact with, who are — who’ve got money — really don’t view gold as an effective alternative”.

That last quote is probably the best counter to Clif’s claim: the reason Ray Dalio and the coterie of players he has contact with don’t view gold as an effective alternative is because they would move the price, a lot.

Some may argue that such manipulations only affect the price in the short term and the price would recover as the manipulator buys back their position. True, if one wanted to cover themselves within the same day. But consider the July 20th price smash – yes the price has recovered, but it is still $30 below where it was before the selling. If the 22 tonnes was one person they could have bought back their position by now by buying only 3 tonnes a day, which as we have established above, would not move the price.

Chris argues that “is the gold market or any market really bigger than institutions that are fully empowered to create infinite money — central banks?” I would say the quotes above show that one hardly needs infinite money, as the gold market does not have the legendary but vague liquidity that many have claimed it has.

anandsr

Thanks Bron. A very informative post.

Shavi Tupyraz

Let’s hope Keef is reading this ……

[ultimately, a lack of in-depth liquidity could of course cut both ways – shifting the market either up or down, depending upon the position taken – but if buying e.g. 100 tons really does put some lead in the Bid’s pencil, then where would we have been by now if not for the so-say perennial “Chinese buying” or Andrew Maguire’s much-touted “institutional clients” who were going to support the market at $1200? They didn’t last long, did they ……]

DaveG99

Shavi,

Your well presented case is balanced on the assumption that this is a market left alone by those with an agenda. Going back to Bron’s article, he doesn’t really address the issue; but others have.

IMHO the GATA evidence is now overwhelming. Check Chris Powell’s speech in Germany late last year where reams of documents and first hand quotes are presented and should be read in its entirety. Judge it for yourself.

The question is can this be perpetuated for ever. I’m not close enough to know for sure, but once price goes to some point below a laissez faire market clearing price, the short position becomes a liability impossible to cover. How else does one explain the massive quantities purchased in April 2013 in China – and rather tepid sales today, $200 oz lower.
Notwithstanding the stock market there, have financial conditions changed that much?
I think its wariness and fear that the manipulators will strike again.

Like the kid in the back of the car, are we there yet?

Shavi Tupyraz

“a laissez faire market clearing price”

and what might one of those be?The equilibrium price at which Willing Sellers are evenly balanced with equally Willing Buyers? With respect, I would suggest that if that is the case, then we may indeed still have some very considerable downside from here, because not only are the Sellers apparently every bit as keen as they ever were, the Buyers have backed off ever so slightly

Every bargain – a personal promise, the terms of a contract, sale of a house, dropping 50 tons on COMEX – is potentially open to manipulation, and certainly there are a myriad of different motives and aspirations underlying each deal; it was ever so. However, when people “short” Gold – and I would suggest that you take care to use that phrase appropriately – they do not sell into a vacuum or simply dump bars of metal into a landfill site: somebody has to buy the stuff

Such people come in two forms: those who want it, and those who are merely performing a service, such as a Market Maker. Each sets his Bid price according to perceived utility

– the Hoarder in terms of whether he thinks he can “afford” it in a relative sense (i.e. surplus wealth, rather than putting-bread-on-the-table money) and compared to a) his existing portfolio and b) the marginal attractiveness of Gold vs other Assets. Right now he is probably stuffed to the gills with Gold and other asset classes perhaps appear more attractive, reducing his appetite to “Keep Stackin” ad infinitum

and

– the Bullion Bank, where the commercial expectation is to be able to “lay-off” or Hedge the position. If they are sold Physical, then they will hit the Futures Bid and do a “Cash & Carry” into delivery, and if they are sold “paper” Gold, they will sell physical Gold spot and perform an arbitrage which Keef refers to as “De-carry”. Either way the impact of the sale is transferred into the market where the hedge position is transacted, and, by inversion, the marginal price at which they are willing to Bid for Gold is determined by the market price at which they can offload the risk somewhere else. Just like a bookie, the key is to run a matched book with just the “turn” accruing to the Bank, leaving no residual exposure to the direction of the Gold price itself

I am using up way too much of Bron’s space, your patience and my time writing these comments, and I am going to stop. At least there is some Good News, from all of this, then

Dale Holmgren

I suppose if everyone placed limit orders you could say that the market is determined by the players themselves, but when I buy at the market I am allowing the market makers to dictate the price, which I am sure they will adjust up and down based on other orders they get, and presumably all those other orders push the price around. A limit order to buy below the spot price would automatically push the price lower.

Shavi Tupyraz

Liquidity presumably emanates from a willingness on the part of those who have Gold to sell it to those who haven’t, but who want it. The ultimate question is who has to persuade who into doing a deal or – more prosaically – who is the more motivated / desperate?

Over the past several years a lot of attention has been focused on Asian Buyers, accompanied by myths & legends of how the London Vaults are empty, they are delivering bars with numbers dating back to the 1950’s, and that the supply will inevitable “run out”. Worse still, the Gold will pass from “weak hands” in the West to “strong hands” in the East, never to return…..

Frankly, I think this is utter poppycock nonsense, and misses the point entirely: in fact, it is surely contradicted by the facts – if it was the Asians who were greedily gobbling up every last ounce of supply, how come the price has fallen? And if these Asian hands are so “strong”, how come Koos’s firm in Singapore and jewellery/bullion dealers from Dubai to Mumbai to Shanghai will gladly sell you every last ounce of Gold you could ever dream of?

There is Gold aplenty – at the right price – and because those Weak Hands in the West are ever so slightly more motivated to sell than those greedy greedy Asians are motivated to Buy, the price has fallen very significantly and over a now protracted period of time. The fall from $1900 – odd was not due to the Plunge Protection Team or JP Morgan, it was due to institutional investors in the West deciding they had better things to do with their money, what with low rates, low inflation and profits to be taken on their metals positions.

The only other conclusion is that, by buying in profane size, the Asians have caused the price to collapse – and continue to collapse. This would be – at the very least – counter-intuitive.

My conclusion, therefore, is that market liquidity is not a function of size, but of sentiment. If the Asians really were intent on “stackin”, then either the price would not have fallen in the way it has, or the supply would have dried up. The supply clearly has not dried up, the price has continued to fall, and if anything the Asians have (for a variety of reasons) recently shown reduced interest in the stuff. What we have witnessed – and continue to witness – is not a steady “Pull” from the East, but a relentless and slightly desperate “Push” from the West.

What is not made clear in this article is the other side of any trade. A weight of gold has to go somewhere when bought or sold, it doesn’t just disappear.

All the recent hoo har over midnight sales of gold had to have a buyer waiting, even if it was a programmed buyer.

What moves the price one way or the other are the aggregated trades of the players who move first. If it is sellers who move first then price drops, that is what moved the gold price recently. It was players clamouring to buy who took gold to it’s high in September 2011.
No conspiracy to see here, move along please.
…_

When discussing price (and liquidity), what most people miss is that there are two (almost) seperate markets for gold – physical and paper. Both are governed by supply and demand, but whereas the physical gold market suffers from limited supply, the paper market has no supply constraints at all, Thus the price reaction to the same amount of demand in each market is completely different.. Spelling this out, if you wanted to purchase 10t of paper gold – you could do so immediately without hardly effecting the price, but if you wanted to purchase the same amount of physical, it might take weeks or months (average price unknown), or you would have to pay a very substantial premium for immediate delivery (much higher than stated above).

Manipulation is easy because the paper markets can create an infinite SUPPLY of paper gold, sold (as usual – at 2am on a Sunday) to crush the (official) price and then be reported in the financial press as “gold fell because of lack of DEMAND” – and they get away with that even though no physical gold ever changed hands! But try and buy physical at the new price and the US Mint says “sorry, none available, try your luck in the (unofficial and unreported) secondary markets”, as is the case today with Silver Eagles.

Of course, this manipulation of the commodity markets (in London and New York) destroys the economies of the producing countries (such as Australia, Russia and South Africa) and transfers wealth to the consuming countries (such as the USA, UK and China). And I would argue that this is illegal economic warfare, but that is another rant entirely.

To correct the function of the markets, the rules must change but let me first side-track. In the stock market, if you want to short a stock then you must first borrow the actual stock (not just put up a cash as colateral). But in the paper gold market, no such connection with the physical need be made. So if the short sellers of paper gold were required to borrow the physical gold first, then (I think) the rigging would end immediately. Even if the short seller were required to put up (say) 1% of the transaction in physical, then the paper supply used to manipulate would be constricted by the lack of physical supply.. Until this occurs, we can expect there to be two seperate markets – and I let you be the judge as to which is real and which is pure nonsense.

Shavi Tupyraz

You are wrong. It really is that simple.

Fraser

India is both a non-producer and large buyer of physical gold, and therefore has a vested interest in a lower price. So tell me Shavi – is this the reason why you object to a discussion of price manipulation, or is there something specific you take issue with? Enlighten us with your counter argument…

See http://www.gata.org/files/Pollitt&CoLetter-February2016.pdf for an additional data point: “we recently asked a refiner and gold custodian what would it take to make a dent in the market? … A billion dollars worth of gold we would have to go look for, he averred. A billion dollars is about 30t of gold.”